Stochastic impulse control with regime switching for the optimal dividend policy when there are business cycles,taxes and fixed costs

We consider the problem of finding the optimal dividend policy for a company whose cash reserve follows a Brownian motion with drift and volatility modulated by an observable finite-state continuous-time Markov chain. The Markov chain represents the regime of the economy. We allow fixed costs and taxes associated with the dividend payments. This optimization problem generates a stochastic impulse control problem with regime switching. We solve this problem and obtain the first analytical solutions for the optimal dividend policy when there are simultaneously fixed costs, taxes and business cycles. Our results show that the optimal dividend policy depends strongly on the regime of the economy, on fixed costs and on taxes.     

Optimal timing of regime switching in optimal growth models: A Sobolev space approach

This paper analyses the optimal timing of switching between alternative and consecutive regimes in optimal growth models. We derive the appropriate necessary conditions for such problems by means of standard techniques from the calculus of variations and some basic properties of Sobolev spaces.     

Analytic solutions for infinite horizon stochastic optimal control problems via finite horizon approximation: A practical guide

We show how infinite horizon stochastic optimal control problems can be solved via studying their finite horizon approximations. This often leads to analytical solutions for the infinite horizon problem by studying phase diagrams, even in cases where the complexity of the finite horizon case does not permit analytic solutions. Our approach can be applied to many problems in dynamic economics.     

A benchmarking approach to optimal asset allocation for insurers and pension funds

We solve the optimal asset allocation problem for an insurer or pension fund by using a benchmarking approach. Under this approach the objective is an increasing function of the relative performance of the asset portfolio compared to a benchmark. The benchmark can be, for example, a function of an insurer’s liability payments, or the (either contractual or target) payments of a pension fund. The benchmarking approach tolerates but progressively penalizes shortfalls, while at the same time progressively rewards outperformance. Working in a general, possibly non-Markovian setting, a solution to the optimization problem is presented, providing insights into the impact of benchmarking on the resulting optimal portfolio. We further illustrate the results with a detailed example involving an option based benchmark of particular interest to insurers and pension funds, and present closed form solutions.     

Necessary conditions for optimal singular stochastic control problems

In this paper, necessary conditions of optimality, in the form of a maximum principle, are obtained for singular stochastic control problems. This maximum principle is derived for a state process satisfying a general stochastic differential equation where the coefficient associated to the control process can be dependent on the state, extending earlier results of the literature.     

The global decomposition theorem for Hochschild (co-)homology of singular spaces via the Atiyah-Chern character

We generalize the decomposition theorem of Hochschild, Kostant and Rosenberg for Hochschild (co-)homology to arbitrary morphisms between complex spaces or schemes over a field of characteristic zero. To be precise, we show that for each such morphism X→Y, the Hochschild complex HX/Y, as introduced in [R.-O. Buchweitz, H. Flenner, Global Hochschild (co-)homology of singular spaces, Adv. Math. (2007), doi: 10.1016/j.aim.2007.06.012], decomposes naturally in the derived category D(X) into _⊕p?0Sp(LX/Y[1]), the direct sum of the derived symmetric powers of the shifted cotangent complex, a result due to Quillen in the affine case.Even in the affine case, our proof is new and provides further information. It shows that the decomposition is given explicitly and naturally by the universal Atiyah-Chern character, the exponential of the universal Atiyah class.We further use the decomposition theorem to show that the semiregularity map for perfect complexes factors through Hochschild homology and, in turn, factors the Atiyah-Hochschild character through the characteristic homomorphism from Hochschild cohomology to the graded centre of the derived category.     

Construction of asymptotically optimal controls for control and game problems

Recently the connection between control and game problems and Backward Stochastic Differential Equations has been established. This allows us to use an approximation scheme for such equations in order to construct an ɛ-optimal control. Received: 13 November 1995 / Revised version: 11 February 1998     

Global Hochschild (co-)homology of singular spaces

We introduce Hochschild (co-)homology of morphisms of schemes or analytic spaces and study its fundamental properties. In analogy with the cotangent complex we introduce the so-called (derived) Hochschild complex of a morphism; the Hochschild cohomology and homology groups are then the Ext and Tor groups of that complex. We prove that these objects are well defined, extend the known cases, and have the expected functorial and homological properties such as graded commutativity of Hochschild cohomology and existence of the characteristic homomorphism from Hochschild cohomology to the (graded) centre of the derived category.     

Existence of Dafermos profiles for singular shocks

For a model system of two conservation laws, we show that singular shocks have Defermos profiles.     

On the singular Bochner-Martinelli integral

The Bochner-Martinelli (B.-M.) kernel inherits, forn2, only some of properties of the Cauchy kernel in . For instance it is known that the singular B.-M. operatorM _n is not an involution forn2. M. Shapiro and N. Vasilevski found a formula forM ₂ ² using methods of quaternionic analysis which are essentially complex-twodimensional. The aim of this article is to present a formula forM _n ² for anyn2. We use now Clifford Analysis but forn=2 our formula coincides, of course, with the above-mentioned one.     

Weak Dirichlet processes with a stochastic control perspective

The motivation of this paper is to prove verification theorems for stochastic optimal control of finite dimensional diffusion processes without control in the diffusion term, in the case where the value function is assumed to be continuous in time and once differentiable in the space variable (C^0,1$C^{0,1}$) instead of once differentiable in time and twice in space (C^1,2$C^{1,2}$), like in the classical results. For this purpose, the replacement tool of the Itô formula will be the Fukushima–Dirichlet decomposition for weak Dirichlet processes. Given a fixed filtration, a weak Dirichlet process is the sum of a local martingale M$M$ plus an adapted process A$A$ which is orthogonal, in the sense of covariation, to any continuous local martingale. The decomposition mentioned states that a C^0,1$C^{0,1}$ function of a weak Dirichlet process with finite quadratic variation is again a weak Dirichlet process. That result is established in this paper and it is applied to the strong solution of a Cauchy problem with final condition.     

Gibbs states of the Hopfield model in the regime of perfect memory

Summary We study the thermodynamic properties of the Hopfield model of an autoassociative memory. IfN denotes the number of neurons andM (N) the number of stored patterns, we prove the following results: IfM/N 0 asN , then there exists an infinite number of infinite volume Gibbs measures for all temperaturesT<1 concentrated on spin configurations that have overlap with exactly one specific pattern. Moreover, the measures induced on the overlap parameters are Dirac measures concentrated on a single point and the Gibbs measures on spin configurations are products of Bernoulli measures. IfM/N , asN for small enough, we show that for temperaturesT smaller than someT()<1, the induced measures can have support only on a disjoint union of balls around the previous points, but we cannot construct the infinite volume measures through convergent sequences of measures.Work partially supported by the Commission of the European Communities under contract No. SC1-CT91-0695     

Time discretization and quantization methods for optimal multiple switching problem

In this paper, we study probabilistic numerical methods based on optimal quantization algorithms for computing the solution to optimal multiple switching problems with regime-dependent state process. We first consider a discrete-time approximation of the optimal switching problem, and analyse its rate of convergence. Given a time step h$h$, the error is in general of order (hlog(1/h))^1/2${(hlog(1/h))}^{1/2}$, and of order h^1/2$h^{1/2}$ when the switching costs do not depend on the state process. We next propose quantization numerical schemes for the space discretization of the discrete-time Euler state process. A Markovian quantization approach relying on the optimal quantization of the normal distribution arising in the Euler scheme is analysed. In the particular case of uncontrolled state process, we describe an alternative marginal quantization method, which extends the recursive algorithm for optimal stopping problems as in Bally (2003) [1]. A priori L^p$L^p$-error estimates are stated in terms of quantization errors. Finally, some numerical tests are performed for an optimal switching problem with two regimes.     

The switching element for a Leonard pair

Let V denote a vector space with finite positive dimension. We consider a pair of linear transformations A:V→V and A^∗:V→V that satisfy (i) and (ii) below:

(i)

There exists a basis for V with respect to which the matrix representing A is irreducible tridiagonal and the matrix representing A^∗ is diagonal.

(ii)

There exists a basis for V with respect to which the matrix representing A^∗ is irreducible tridiagonal and the matrix representing A is diagonal.

We call such a pair a Leonard pair on V. Let (resp. ) denote a basis for V referred to in (i) (resp. (ii)). We show that there exists a unique linear transformation S:V→V that sends v₀ to a scalar multiple of v_d, fixes w₀, and sends w_i to a scalar multiple of w_i for 1?i?d. We call S the switching element. We describe S from many points of view.     

The maximum principle for the nonlinear stochastic optimal control problem of switching systems

The aim of this paper is to present a stochastic maximum principle for an optimal control problem of switching systems. It presents necessary conditions of optimality in the form of a maximum principle for stochastic switching systems, in which the dynamic of the constituent processes takes the form of stochastic differential equations. The restrictions on transitions for the system are described through equality constraints.     

Regularity for a Schrödinger equation with singular potentials and application to bilinear optimal control

We study the Schrödinger equation i∂_tu+Δu+V₀u+V₁u=0 on R³×(0,T), where V₀(x,t)=|x-a(t)|^-1, with a∈W^2,1(0,T;R³), is a coulombian potential, singular at finite distance, and V₁ is an electric potential, possibly unbounded. The initial condition u₀∈H²(R³) is such that . The potential V₁ is also real valued and may depend on space and time variables. We prove that if V₁ is regular enough and at most quadratic at infinity, this problem is well-posed and the regularity of the initial data is conserved for the solution. We also give an application to the bilinear optimal control of the solution through the electric potential.     

Constant elasticity of variance model for proportional reinsurance and investment strategies

In our model, the insurer is allowed to buy reinsurance and invest in a risk-free asset and a risky asset. The claim process is assumed to follow a Brownian motion with drift, while the price process of the risky asset is described by the constant elasticity of variance (CEV) model. The Hamilton-Jacobi-Bellman (HJB) equation associated with the optimal reinsurance and investment strategies is established, and solutions are found for insurers with CRRA or CARRA utility.     

An analytic approach to purely nonlocal Bellman equations arising in models of stochastic control

Given a bounded domain Ω⊂Rd and two integro-differential operators L¹, L² of the form we study the fully nonlinear Bellman equation

(0.1)